A divided world sends a series of gloomy messages

Marc Sidwell
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VODAFONE has been a lucrative stock for shareholders of late, at least in terms of the billions in dividends and share buybacks: £10.2bn in cash returns in 2012 alone. Investors seemed ready to keep the faith yesterday, buoying the share price. But at some point the fundamentals have to reassert themselves. And on the latest figures, there are reasons to worry.

Mobile firms are suffering from the same challenging market conditions in the developed world as everyone else. But Vodafone has it especially bad because the vast majority of its revenue, 69 per cent in 2012, comes from Europe.

Yesterday’s figures for the last quarter of 2012 showed just how bad the European figures are getting, with double-digit declines in service revenue in both Spain (-11.3 per cent) and Italy (-13.8 per cent).

More worrying is the decline in European markets that ought to have been more robust, with northern and central European revenue down 0.9 per cent. Careful consumers, evidently feeling the pinch in their pockets, were visible in the UK, where reported revenue fell 4.5 per cent, in part on less out-of-bundle use (use in excess of a contractual data plan). The same effect occurred in the Netherlands, where revenue on an organic basis fell by 3.5 per cent on less out-of-bundle use, less roaming and a greater appetite for cheaper mobile plans. Even in Germany, reported revenue fell 5.9 per cent.

Of course, other parts of the world free of the European disease are still providing the opportunity for rapid growth. Service revenue was up 18.4 per cent in Turkey and nine per cent in India. But Vodafone’s non-European divisions in Africa, Middle East and Asia-Pacific are tangential, contributing just 13 per cent to the group’s adjusted operating profit in 2012. And overall in the last quarter the region saw service revenue up by 2.7 per cent, which was a slowdown in the pace of growth: down 1.4 per cent quarter-on-quarter. In Australia, service revenue fell by 16 per cent.

One quarter does not make the year, and Vodafone is still guiding that the 2013 financial year will see adjusted operating profit at the upper end of the range between £11.1bn and £11.9bn. That would put 2013 on a par with recent years, (in 2012 it was £11.5bn; 2011, £11.8bn; £2010, £11.5bn). But it also means no profit growth at best and, given the huge contribution its Verizon stake makes to Vodafone’s profitability (accounting for 41.7 per cent of adjusted operating profit in 2012, only just behind Europe’s 46 per cent), keeping profit on track may not be so surprising. One alarm bell to listen for is the possibility of a decline in service revenue growth for the year, given that service revenue was down in the last quarter of 2012 by 2.2 per cent. Service revenue growth is one of Vodafone’s key targets for its 2015 strategy, and it is targeting one to four per cent growth in service revenue every year until 2014. It last missed the target in 2010, but in these tough conditions, it could happen again. The market may not want to hear the message, but the signals from Vodafone look increasingly weak.